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Saturday, August 4, 2012

Limited Liability and Bursting Bubbles

This occurs in every market, not just petroleum.

The following is an account of how the financial system and
corporations evolved, or rather didn’t. As designed, they have been spreading
the monopolistic control of the privileged class while protecting them from the
consequences of their actions since the 1550s. The system has always been
unstable and has been producing bubbles and crashes since it came into
existence, and for all the same reasons.

Why doesn’t it get fixed? Because the few who benefit
without risk are still largely in control, and the lure of quick profit too
often trumps real investment in the future. The instant fix of the gambler runs
our financial systems. Everyone but the gamblers pays when luck turns against
them, as it always does.

The First Corporations
and Stocks

“Companies such as The Russia Company (1555) and the East
India Company (1600) were charter companies that evolved from loose umbrellas
covering a recurring series of self-liquidating ventures to permanent entities
possessed of substantial assets in the form of ships, trading posts, and
inventories. The East India Company, for example, originally raised capital
(the joint stock) for each voyage separately and at the end, the property was
divided among the subscribing venturers. As the company acquired more permanent
property, it became increasingly difficult to identify assets with individual
voyages and it became necessary to allocate them (and hence profits) among
voyages. This problem was lessened by raising capital subscriptions for
four-year terms, one quarter to be paid up each year.”[1]

The first corporations
were colonial monopolies, given to the relatives and friends of royalty, which
exploited the resources of conquered territories and peoples. They traded
spice, and furs, and slaves, while spreading violence and disease. No wonder that
stocks should be called the same name as a device of humiliation, punishment,
and social control.

The Introduction of
Stock Trading

In 1657, “the principal of permanently invested capital and
transferable shares was adopted. As a result, future distributions no longer
represented divisions of assets at the conclusion of a venture, but rather
“dividends” paid from profits.” [2]

This was the start of the separation of responsibility from
profit, by having the investor included as part of a pool of capital rather
than part of the venture itself.

The Largest Private Commercial
Empire

In 1670, “King Charles II issued a grant for the Company of
Gentlemen Adventurers Trading into Hudson Bay, known today as the Hudson’s Bay
Company or the Bay. The charter provided a monopoly over trade in the lands fed
by rivers flowing into Hudson Bay, the equivalent of 40% of modern Canada.
Known as Rupert’s Land until after Confederation, it was history’s largest
private commercial empire. To manage such a huge trading area required a
well-capitalized organization and permanent business operations.”[3]

Corporate monopolies ruled like kings then, and are trying,
along with their neoconservative neoliberal allies, to return us to that
situation. Serfs are so much easier to deal with than citizens.

The First Time It All
Crashed

From 1690 to 1720, “periods of boom and crisis succeeded
each other in the market, culminating in a major crash in 1720. Known as the South Seas Bubble, its crash is associated
with the South Seas Company organized in 1711 to obtain a government monopoly
on trade in South America and to acquire government debt cheaply, thereby
establishing a firm base of assets.

“The idea was that the company
would accept all unfunded government debt (debt that did not have a specific
revenue source earmarked for its repayment) at par in subscription for its
shares. The theory was that ownership of that debt by the company would provide
it with an undoubted “fund of credit” against which it could borrow to finance
its activities.

“In 1719, a company production
boom began in England on a highly speculative basis. As the boom progressed,
the stated objects of many of the companies became increasingly improbable, so
that sceptical observers referred to them as “bubble companies.”

“In early 1720 the South Seas
Company took advantage of the speculative fever by successfully competing with
the Bank of England (then privately owned) to win the right to undertake a new
scheme involving national debt. The scheme called for the company, as before,
to buy in outstanding government debt (this time funded debt) in return for
subscriptions of shares.

“This government-abetted scheme
for share price inflation through treating capital proceeds as income met with
ill-deserved success. That very success created problems, however, for there
was not enough cash in the country available for investment to buy up the bonus
shares. So the shares were sold for very little cash down and credit was
extended for the remainder of the price, the shares themselves being accepted
as security.

“To eliminate competition, the
company encouraged parliament to pass the so-called, “Bubble Act.” Effective
June 24, 1720, prohibited the offering of shares for public subscription by
companies that did not have a charter or that had a charter for activities
other than those for which it was raising money.

“Two months later, the South Seas
Company instigated legal action against four other companies for contravention
of the Bubble Act. A rapid fall in price shares of the companies attacked
resulted in margin calls. These triggered liquidation off shareholdings,
thereby putting pressure on the share prices of all companies, including the
South Seas Company. In the space of less than two months the company’s shares
fell from a peak of £1,000 to £180. The rapid collapse of the boom left the
fledgling capital market sadder but not permanently wiser and led to a
prolonged distrust of joint-stock companies that set their evolution back for a
century.”[4]

So, 1929 was far from the first great crash, and 2008 will
not be the last. This shows that instability has been inherent in the system
since its beginnings. Again and again, lack of effective regulations and
rampant speculation has brought down the economy and generated widespread suffering.

The Solidification of
Limited Responsibility for Unlimited Profit

From 1825 to 1856, “spurred by the Industrial Revolution and
the expansion of the British Empire, Britain passed parliamentary measures that
effectively created the legal framework for the modern company. By the end of
this period a company could obtain legal status through registration. The
investor had no liability beyond the amount invested in the company shares;
creditors had no recourse to a limited company’s investors. In addition the
public company could have any number of shareholders.”[5]

Here is where it became possible to gamble on the numbers
rather than investing in actual enterprises. The gambler takes no responsibility
for the actions of the thing invested in. He is a bank machine that is turned
into a VLT by speculation and the pursuit of quick profit from stock trading, rather
than as dividends from the actual venture. To be invested, you must be part of
what you invest in; you should take a portion of the risk equal to the size of
the investment and possible benefit. That might discourage gambling and
corruption.

Responsible Investing
for Reasonable Dividends

Something needs to be done. This self-service cycle of
bubble and crash has been going on for over 400 years. I think it’s time we
admit the system isn’t working. As democracy sweeps the world, so to must
economics that benefit as many, rather than as few, people as possible, with
exploitation. Only then can a sustainable working global economy be created.

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About Me

The Pündi are a race from my fantasy novels, the Continuum Chronicles, an exploration of spiritual evolution theory. Appearing like us, they are really child-sized aliens cursed by their own intelligence, trapped as observers unable to share their knowledge. They often develop an individual obsessive interest.

I write and publish, not selling anything, just trying to share ideas that might profit everyone. I aim not for originality but creativity, organizing what exists to generate new associations. I'm a writer with thick glasses and autism, familiar with the struggle for clarity. Novelist, researcher, internet activist, spiritual evolutionist, and process philosopher, I believe in democratic social capitalism with a well-regulated engine of sustainable markets. As a writer, I find that most blockages tend to be improvements trying to occur to me.